A recent Scotsman Guide article takes a hard look at what’s building in the FHA space and it includes accelerating delinquencies, evaporating equity, and a market positioning itself for a wave of short sales. The data is striking and the implications for servicers are urgent.
Five Years of Deferred Reality
When pandemic-era partial claim flexibilities ended last April, it didn’t create a new problem. It revealed one that had been quietly building for years.
From 2020 to 2025, servicers were never allowed to ask a borrower whether they even had a job. A borrower could fall behind, receive a partial claim, make one or two payments, fall behind again, and repeat the cycle. Some borrowers went through that loop as many as five times.
By October 2025, roughly 50% of FHA borrowers requesting new assistance had a prior partial claim. In 2022, that number was around 5%. That’s not a blip. That’s a structural problem that was masked for years.
According to Donna Schmidt, CEO of DLS Servicing, “Some of these people couldn’t afford the house anymore but we had no way to deny them if they told us they could. FHA has created its own problem by constantly doing the hamster wheel and allowing borrowers to keep getting partial claims.”
Now the wheel has stopped.
The Equity Math Is Brutal
Most FHA borrowers put down 3% to 3.5%. Partial claims stacked against those already thin equity cushions, especially in markets where home prices have flattened or declined, all saw year-over-year price drops in Q4 2025.
The data suggests that a vast majority of borrowers who have needed loss mitigation assistance in the past are underwater. When there’s no equity and no affordable path forward, people walk away. Servicers need to guide these borrowers towards short sale participation (where the borrower is permitted to sell the property at market value, even if the final proceeds from the sale are less then needed to pay all of the mortgage’s obligations).
What Servicers Should Expect
Schmidt predicts we’re going to see five years of what should have been normal foreclosure activity get compressed into 2026 and 2027.
For servicers, that means:
- Short sale volume is going to rise
- Borrower outreach must happen early
- FHA loss mitigation frameworks have changed
- Quality control is not optional
The servicers who will perform well through this cycle are the ones who get ahead of it, not the ones reacting to it once the referrals are already piling up.
This Is Not 2008, But Some Lessons Are the Same
The parallels to 2008 are real, but context matters. This isn’t a collapse driven by predatory lending or systemic fraud. It’s a convergence of thin equity and years of loss mitigation that delayed, rather than resolved financial stress.
The outcome for underwater borrowers looks familiar and some are already positioning for that reality. Title companies in Florida are spinning up affiliate real estate companies specifically to handle short sale volume. That’s not a coincidence.
Servicers should be doing their own version of preparation, assessing their FHA portfolios now, identifying high-risk segments, and making sure their teams and processes are ready for what’s ahead. At DLS Servicing, we believe the difference between portfolios that weather this cycle and those that don’t will come down to being prepared. The wave is building. The question is whether you’re prepared when it gets here.